What you need to know for 2016/17
One of the biggest changes that has affected contractors is the increase on Limited Company dividend tax, that was imposed on 6th April 2016.
Previously, taking a small salary and drawing the rest through dividends was the most efficient way of paying yourself.
However, changes to the old system have seen the introduction of a new dividend tax allowance of £5,000. For dividend payments over £5k, tax is charged at the basic rate of 7.5% (up to £32k), 32.5% for higher rate payers (up to £43k), and 38.1% beyond this.
Despite the increase, this method still remains the most tax efficient solution for contractors, however there are still clever moves you can take to minimise the effects…
How to reduce the effects of the dividend tax changes
As you may know, retained profits aren’t subject to tax. So, if you’re able to, you can use it for things that you may have paid for out of your net income.
For example, you can now fund a very tax-efficient pension from your Limited Company.
Or, if you have a Life Insurance policy, you can change it to a Relevant Life Policy – which allows companies to provide life insurance cover for employees. Because it’s paid from pre-tax company profits, this will reduce your corporation tax.
You could even consider diversifying with a property portfolio. As a Limited Company you can claim tax relief on mortgage interest payments, making buy-to-lets highly attractive. Do bear in mind though; Limited Companies typically pay higher mortgages rates than individuals.
Get further advice
For more ways to minimise the effects of this year’s legislation changes, fill out the form below.